Coeur outbids First Majestic for Orko

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By: Salma Tarikh2013-02-20

Coeur d’Alene Mines (CDM-T, CDE-N) has trumped First Majestic Silver (FR-T, AG-N) in a contest to acquire Orko Silver (OK-V) for its coveted La Preciosa project, ranked as one of the world’s largest undeveloped silver deposits.

To get its hands on the 324 sq. km property in Mexico’s Durango state, Coeur is offering Orko’s shareholders a mix of cash, shares and warrants. Its Feb. 13 proposal valued Orko at $384 million, or $2.70 per share, which is now worth $350 million, or $2.46 per Orko share, as Coeur’s shares have tumbled 13% since and continue to slide.

But if the deal goes through, it could cement Coeur’s position as a leading silver producer. The Idaho-based miner already has four producing silver and gold mines in the Americas — including Palmarejo in northern Mexico, which ranks as the world’s fifth-largest primary silver mine — and says La Preciosa would boost its growth profile, lower geopolitical risk and increase its presence in Mexico.

The deposit has an open-pittable 30 million tonnes grading 104 grams silver in measured-and-indicated resources and 48 million tonnes at 86 grams silver in inferred. It also has 2 million tonnes at similar grades underground.

Coeur envisions developing La Preciosa — which covers Tertiary-aged, silver- and gold-bearing epithermal quartz veins — as a large, open-pit operation. It estimates the project could produce 7 million to 9 million oz. silver per year for at least 15 years.

First Majestic — which has all of its operations in Mexico, including the Del Toro and La Parrilla silver mines near La Preciosa — envisaged building the project as a combined open-pit and underground operation, and tabled a friendly bid for Orko on Dec. 16.

That offer was worth $387 million, or $2.72 per share, but the day before Coeur entered the fray, it had an implied value of $307 million, or $2.16 a share, as First Majestic shares lost 20% since the bidding started.

On Feb. 13, Orko’s board unanimously concluded that Coeur’s offer was superior based on the closing price of all three companies, but gave First Majestic until Feb. 19 to improve its bid, with analysts split on whether the company would stay in the race for the large silver deposit.

After the market closed on Feb. 19, First Majestic bowed out and didn’t match Coeur’s offer. “It is our view that by increasing the offer beyond our previous bid, the economics of the La Preciosa project drop below our minimum requirements for a rate of return and financial payback to our shareholders,” Keith Neumeyer, First Majestic’s president and CEO, explained in a statement.

But its attempt to acquire Preciosa was not entirely fruitless, as the company will collect an $11.6-million termination fee from Orko.

“We believe that First Majestic has made the correct decision by walking away from Orko,” Chris Thompson of Raymond James writes. “Although the loss of La Preciosa does mute long-term growth, this does not alter our view that FR offers best-in-class near-term growth, deliverable by building asset strength from the ground up, not via chequebook.”

With First Majestic out of the picture, Coeur entered a definitive agreement on Feb. 20 to buy all of Orko’s outstanding shares.

The current $2.46-per-share offer price represents a premium of 56% to Orko’s Dec. 14 close, the last trading day before First Majestic’s bid, and 15% to its Feb. 12 close, the day before Coeur made its move.

Under the current agreement, Orko shareholders could exchange each share for one of three options: 0.0815 of a Coeur share and 70¢ in cash; 0.1118 of a share; or $2.60 in cash. The cash-and-share components are capped at $100 million and 11.6 million shares.

Regardless of what they choose, shareholders would also receive 0.01118 of a Coeur warrant for each Orko share. A whole warrant can be converted into one Coeur share at an exercise price of US$30 within four years.

Once the transaction is complete, Orko will own 11% of the combined entity, not including the warrants. The agreement requires regulatory and Orko’s shareholder approval, and is expected to close in April.

If Orko ditches Coeur’s proposal it will have to pay an $11.6-million termination fee, similar to the First Majestic proposal.

On Feb. 13, the day Coeur launched its bid, Orko gained 21.5% to close at $2.60, while Coeur fell 10% to $21.12. At press time on Feb. 20, Orko was trading at $2.24 and Coeur at $19.16.

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